For more than a year now gold’s price has been in a correction phase, never surpassing last year’s peak of just under $2,000 per ounce.
Does this imply the rising market in gold, which has been going on since the 1970s, has ended? There are a multitude of reasons for thinking otherwise. The core reason for believing in the ultimate strength of the price of gold is the steady debasement of the U.S. dollar, a trend that certainly is continuing.
This has been temporarily obscured by the relative strength of that currency compared to others. Clearly, the dollar is overvalued. Witness the chronic foreign trade deficits, running at more than $420 billion annually, something that is not sustainable.
That number will grow exponentially as imports will soar because of the need for medical care of its aging population and concomitantly social security pensions that are underfunded. Imports to meet these entitlements will have to rise.
Gold’s price is dominated in U.S. dollars, so the relatively strong U.S. dollar, even though it is only short-lived, means that it will take fewer dollars to purchase gold. Hence, the price of gold will weaken.
The main factor to keep in mind is the global debt crisis besetting all nations that are printing money to take care of their debt. For many years the “solutions” have been more inflation/currency devaluation. Almost without exception they have avoided fiscal responsibility by resorting to money printing, thereby devaluing their currency, inflating their way out of the ongoing deficits.
Few realize what this process has entailed, the fantastic inflation that has taken place. Since 1950 prices in North America have climbed 963%, so that to equal $1 it would take more than $860 dollars.
The U.S. central bank, the Federal Reserve System, is continuing its program of adding $85 billion of stimulus monthly to revive the economy, “paid for” by printing money. Canada too has been affected by this policy.
One investment dealer said that this was not a matter of concern. If inflation developed, it was argued, then Federal Reserve could contract the money supply and raise interest rates. That had been possible previously, but with debts so high that would collapse the economy. Too, there is no political will for such a program. Central banks everywhere are aware of what is going on, and are buying gold against their dollar reserves.
There is a great deal of scepticism that gold reserves of foreigners held in New York actually exist; they may have been loaned out or sold. Why was Germany told that it would take seven years to return its gold reserves?
When reality sets in, the present quiescent gold market will experience a strong upward move. The timing is uncertain, but it is completely predictable and inevitable.